Diversification is a development strategy that involves businesses entering into additional operation lines different from the current production. This is considered a powerful tool of business due to the reduction of business risks and increased levels of competitive advantage associated (Hitt, Ireland and Hoskisson, 2010). While diversification may not guarantee performance, it eliminates the risks of investment loss and mitigates loss on the downward side. Different diversification strategies include; horizontal, vertical, concentric, conglomerate and corporate diversification. The determining factor on the diversification measure to adapt usually depends on the size of a business and expected growth.
The whole concept of diversification is based on innovation and corporate entrepreneurship; from the production of new products and new production processes. Corporate entrepreneurship involves recognition of viable means for sustaining and promoting business performance and corporate competitiveness. The activities involved in corporate entrepreneurship develop new revenue streams and promote process and product innovations to enhance success. For business success, there must be that willingness to take any form of risk that diversification brings forward, pioneering of the new products and enriching of business competitiveness (Morris, Kuratko and Covin, 2011).
Innovation drives change in two different ways; this includes product portfolio and diversification. It determines how the intended changes influence the intended value of a firm. Innovation promotes product differentiation and brand extensions. For instance, if a firm intends to extend its production to new products with little or no commercial and technological relation with the current production, then the production has to be assessed in terms of differentiation and value. The innovative move must relate to the business policy and promote its growth. The diversification strategy that a business adapts relates to the type of innovation. The decision to diversify is fully based upon the type of innovation. For example, an innovation to enlarge production, by fully utilizing the available resources and technology, is a concentric diversification strategy. The aim of fully utilizing the resources is to improve on production base and market competition, which leads to growth.
Corporate entrepreneurship, on the other hand, involves the establishment of new firms within existing corporations. These firms are considered as vital for business growth and are a strategy to business diversification. In some cases, corporate entrepreneurship may involve radical changes in the internal behavior patterns of an organization (Hitt, Ireland and Hoskisson, 2010). This may result to a complete change in an organization means of production, value of production and its management policies. This promotes diversification in that the existing customers are maintained while product differentiation attracts new customers. The process rejuvenates and revitalizes a company’s strategy for expansion and growth.
The impact of corporate entrepreneurship is mostly on the internal development diversification strategy. In this case, new resources are combines to extend the activities of the firm in unrelated or marginally related areas to a current domain of correspondence and competence that promotes growth opportunities. The results of corporate entrepreneurship are production of new products and markets which leads to increase in supply and market extensions (Morris, Kuratko and Covin, 2011).
The impact of innovation and corporate entrepreneurship on diversity is usually measured by the manifestation of the risks and generation of value. If the idea whether innovated or a corporate decision imposes diversification risks than value, then the strategy should not be adapted. The best diversification strategy is that which derives value and growth from the innovation and/or corporate entrepreneurship decision (Hitt, Ireland and Hoskisson, 2010).
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2010). Strategic management competitiveness & globalization. Mason, OH: South-Western Cengage Learning.
Morris, M. H., Kuratko, D. F., & Covin, J.G. (2011). Corporate entrepreneurship and innovation: Entrepreneurial development within organizations. Mason, OH: South- Western Cengage Learning.